Author Archive

Hard and Soft Obscurantism

| Lasse Lien |

I recently attended a presentation by the great social scientist Jon Elster, in which he lamented the state of affairs in social science. Elster has – quite nicely, IMHO – coined the terms hard and soft obscurantism as the main problems. To Elster, obscurantism generally refers to endeavors that are unlikely to produce anything of value, and where this can be predicted in advance. This in contrast to more honorable failures, where a plausible hypothesis turns out to be wrong, leaving much effort without much value.

Soft obscurantism is exactly what it sounds like. Unfalsifiable, impenetrable theories which often proudly ignores standards for argument and evidence that elsewhere constitute the hallmark of the scientific method. Examples are post modernism (Latour), structuralism (Lévi-Strauss), Functionalism (Bourdieu, Foucault), Marxism (Badiou) and psychoanalysis.

But there is a ditch on the other side of the road too. Hard obscurantism refers to mathematical exercises without any tangent to reality, which is useful neither as mathematics nor social science. Another form of hard obscurantism is data mining, or misuse of fancy econometrics, or a combination of the two. Both mathematical games and econometric voodoo give the appearance of “scientificness”, but Elster doesn’t hold his guns about the value created by hard obscurantism either:

“I believe that much work in economics and political science that is inspired by rational-choice theory is devoid of any explanatory, aesthetic or mathematical interest, which means that it has no value at all”

One can of course argue about the size of the size of the total problem, and relative size of each type (personally, I would bet on soft obscurantism as the bigger problem), but the key question is perhaps why obscurantism of either type isn’t gradually rooted out. According to Elster their combined “market share” in the social sciences seems to be growing.

For more, see this and this and this.

23 January 2013 at 5:38 am 12 comments

Arrunada Seminar: Rod Thomas – Developing a Credible Automated System for Agency Registration under a “Registration of Rights” Model

| Rod Thomas |

Developing a Credible Automated System for Agency Registration under a “Registration of Rights” Model

In his book, Arruñada rehearses the debate between mere recordation of deeds versus registration of rights. Under the “registration of rights” model, the registration event may be backed by a State guarantee of ownership, as is the case under a Torrens system. Under such a system, the need for a credible automated system is paramount. This is because the registration event is normally conclusive as to title rights, even in the face of third party ineptness or fraud in undertaking the registration.  By way of example, in Torrens systems, the transaction, once completed, can conventionally only be overturned where the transferee is found to have been fraudulent in obtaining the registered title interest even if the dealing is void at law.

Under a registration of rights model there is a heightened sense of vulnerability where the registration even is undertaken by an agent.  This is because the agent and not the transferee may have been either fraudulent or inept in undertaking the transaction. An example of such a system in operation is the Landonline System, as it presently exists in New Zealand, where only agency registration is possible.

Arruñada also argues that for a registration system to be successful, it needs to be both cost effective and accessible. Consequently a tension arises under a registration of rights model, operated by agency registration. On the one hand effective measures need to be put in place to protect consumers from inept or fraudulent transactions. On the other hand, a system which is overly complex, or expensive to operate, is unlikely to be successful.

Such concerns may be less pressing in countries where digitalised signatures already play a key role in authorising transactions. In those jurisdictions it appears to be a relatively straightforward procedure to incorporate the need for the existing interest holder’s digitalised signature before a transaction can occur. What however of jurisdictions such as the United Kingdom, Australia or New Zealand where digitalised signatures are not in ready use and agency registration is common?

Various possibilities come to mind for these other jurisdictions.  One may be imposing a system where each dealing must first be authorised by a private PIN number known only to the existing land interest holder.   This however may be cumbersome to operate and regulate.  Also, PIN number may not be securely kept, so abuses could still occur.  Another possibility may be to incorporate “flags” into the automated system, so the interest holder is notified of any proposed dealing with his or her interest, and can therefore block the proposed registration before it occurs.

The question therefore needs to be asked; “what possibilities exist under a registration of rights model  (in the absence of electronic signatures) for setting up a safe and cost effective automated system, operated by agency registration?”

Rod Thomas. Senior Lecturer in Law, Auckland University of Technology, New Zealand

21 January 2013 at 4:04 am 2 comments

Arrunada Seminar: Stephen Hansen – Public Institutions and Endogenous Information in Contracting

| Stephen Hansen |

Public Institutions and Endogenous Information in Contracting

Benito Arruñada’s Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries is an impressive and erudite study of the relationship between legal institutions and impersonal exchange. While clearly valuable for better understanding policies regarding formalization, in my mind it also introduces ideas that are relevant for contract theory more generally and yet hardly treated in the literature.

Since the 1970’s economic theorists have understood that information asymmetries between parties who write contracts are a key source of inefficiencies in exchange. Since then, a vast literature has developed exploring this idea from many different angles. Nevertheless, two key features usually appear. First, the set of parties who write contracts all observe each other, know they are contracting with each other, and (with some exceptions) observe the terms of the contracts agreed. Second, the information asymmetries are assumed to be a fixed, exogenous feature of relationships.

Benito’s book convincingly shows that both of these limit our understanding of trading frictions in the real world. A key insight is that, in addition to his “type” or “action” (to use the language of contract theory), the formal contracts that an economic agent has written with others may be unobservable. After reading the book, it became clear to me that this dimension of non-observability is just as important for generating market failure as others. The second, and intimately related, insight is that the degree of non-observability of contractual rights depends on public institutions, in particular registration systems. Whereas it is unclear how a public body would help contracting parties discover — to take a standard example — each other’s preferences over the good they are proposing to trade, Benito shows that they can affect the amount of information they have about each other’s formal legal rights. And, in line with what one would expect, when institutions can reduce this information asymmetry, the likelihood of efficient trades increases.

Putting these two ideas together provides an original and to me very exciting view on the value of legal systems. Economists often discuss “good” legal systems as those which enforce written agreements transparently at low cost. After reading Benito’s book, I recognized that legal systems also act to endogenously affect the amount of information that parties have available to reach those agreements in the first place. This deserves to be an influential idea in future discussions of law, economics, and contract theory.

Stephen Hansen. Assistant Professor. Economics Department. Universitat Pompeu Fabra. Barcelona, Spain

19 January 2013 at 5:24 am 1 comment

Arrunada Seminar: Corrado Malberti (2) – An Empirical Test on the Differences between Recordation and Registration

| Corrado Malberti |

An Empirical Test on the Differences between Recordation and Registration

One key point of professor Arruñada is that “[i]t is safe to assume that recordation is less effective than registration in avoiding title uncertainty”. However, the Author acknowledges that it would be essential to perform some empirical analysis to support his conclusions. Importantly he also acknowledges that comparing the performance of titling systems is a daunting task, and that it should be important to consider the specifics of each country.

To start the debate on this point, professor Arruñada compares simple averages for two samples of European Union countries with different titling systems. The Author discovers that, apparently (at least in Europe), registration systems are not only more effective, but also less costly than recordation systems. However, Arruñada also acknowledges that this data is more a starting point for a fruitful discussion than the end of the debate, since it would be ”premature . . . to interpret these empirical differences as causal effects, given the small samples involved”.

I completely agree with this perspective and, I also believe that, starting from this data, it will be important to further investigate the matter.

However, this also poses the question on which is the direction empirical research should take in future. In fact, it is conventional wisdom among legal scholars that registration is superior to recordation. For example, it was also for that reason that, after the end of WWI, Italy decided to preserve in the new provinces the registration system already in place in Austria-Hungary, and that France decided to maintain the livre foncier in Alsace-Moselle.

Since any generalization concerning the classifications of public registers may have little predictive value on how real legal problems are solved, probably, in future, it will be prudent to carry out empirical analyses that consider homogeneous legal frameworks. This would limit the risks of giving the same label to systems that practically adjudicate disputes in completely different ways. Thus, from this perspective, it would probably be more interesting and valuable to focus the attention on those legal systems, like the French and the Italian, where two different public registers coexist.

Corrado Malberti, Professor in Commercial Law. University of Luxembourg.  Commissione Studi Consiglio Nazionale del Notariato.

17 January 2013 at 6:08 am 1 comment

Arrunada Seminar: Corrado Malberti – The Different Dimensions of Recordation and Registration

| Corrado Malberti |

The Different Dimensions of Recordation and Registration

Concerning the characteristics of registration and recordation, I think that the classification made by professor Arruñada should adopt a more nuanced perspective. In fact, the distinction between, on the one hand, recordation systems where deeds are deposited to facilitate their inspection and that rely on what professor Arruñada calls a property rule, and, on the other hand, registration systems that define rights and that give preference to what professor Arruñada calls a property rule, is probably sacrificing important complexities that exist in the public registers falling in each of these two categories.

In fact, legal scholarship highlighted that the dimensions that should be taken into account in classifying public registers are, at least, three:

  • the first dimension concerns what is entered in the register, either a deed or a right;
  • a second dimension is related to the effects of the entry in the register, either the entry simply regulates the conflicts between two or more acquirers from the same owner, or the entry defines the right;
  • finally, the third dimension concerns the role played by bad faith in making a valid entry in the public register.

The combination of these different dimensions makes the dichotomy between registration and recordation more intricate. And it has been argued that, from a legal perspective, it would be impossible to give to these categories anything more than a didactic relevance. In addition, it should also be noted that, even when classified along these three dimensions, in certain cases public registers adopt peculiar principles (e.g. the sometimes radically different rules governing adverse possession could be taken as evidence of how peculiar the practical results of each legal system could be).

Professor Arruñada makes important efforts in trying to include many of these nuances in his analysis. Yet, for many public registers it is difficult to deny the existing contaminations between recordation and registration.

Corrado Malberti, Professor in Commercial Law. University of Luxembourg.  Commissione Studi Consiglio Nazionale del Notariato

16 January 2013 at 5:00 am 1 comment

Arrunada Seminar: Pamela O’Connor – Conflating Contractual and Property Rights

| Pamela O’Connor |

Conflating Contractual and Property Rights

Coming from a property law perspective, I welcome Arruñada’s recognition of the need for economists to acknowledge the nature of property as as rights in rem (rights in things, enforceable against third parties) and their essential difference from contractual rights that bind only the contracting parties. Although legal scholars such as Bernard Rudden, Thomas Merrill and Henry E Smith have been pointing out the inadequacies of traditional economic conceptions of property for some time, economic theorists have been slow to grapple with the implications.
One consequence of conflating contractual and property rights is apparent in recent Australian legislation on resource rights. State legislatures have introduced new types of rights that run with land and bind third parties as rights in rem, but are largely defined by individual agreements. Their relationship to other property rights remains unclear, and their variability makes them costly for other people to assess. Although uptake of the new rights has been slow, they have the potential to burden land titles with proliferating rights that bind all future owners and which nobody really understands.

Pamela O’Connor. Associate Professor, Faculty of Law. Monash University. Australia

14 January 2013 at 5:13 pm 3 comments

Arrunada Seminar: Paul Dower – Centralized vs. Decentralized Allocation

| Paul Dower |

Centralized vs. Decentralized Allocation

In Benito Arruñada’s insightful new book, Institutional Foundations of Impersonal Exchange: Theory and Policy of Contractual Registries, the widespread failure of titling programs in developing countries is used as motivation for a greater appreciation of the role of contractual registries. In many developing countries, immovable assets, especially land, are initially and subsequently allocated using a centralized mechanism as opposed to a decentralized market mechanism implicitly assumed in the book.

The conflict between those holding property and those acquiring property is different under a centralized allocation mechanism. Sara Berry in Chiefs Know Their Boundaries, an interesting work on an agricultural region of Ghana, describes the political process involved in determining the complicated overlapping and competing property claims in a system where land is allocated by a centralized mechanism. Here, the relevant asset is not exactly land but community membership. This asset consists of various rights, one of which entails a kind of social insurance that functions through land allocated based on perceived need. The chief simultaneously serves as the contractual registry, performing public reallocation of rights when necessary, as well as the steward of the community members’ rights in rem, enforceable against all parties. Since need is imperfectly observable, this allocation mechanism suffers from a moral hazard problem, in which the acquiring party has private information putting the holding party at a disadvantage. In this setting, the registry is and can not be independent but it can aim to be impartial.

This example highlights the institutional specialization required for impersonal exchange, a point made well in the book, but it also points to several difficulties not apparent in the analysis. First, the judgment proof problem is more complicated. Power and social status can create a judgment proof problem that is independent or even negatively correlated with the standard one of not having enough wealth to compensate the victim of a violation of rights.  The judgment proof problem can create problems for the voluntary registration of property claims. Second, the asset that is transferred or involved in transactions in a centralized system may not easily map into assets exchangeable in a decentralized system. Here, there is a parallel to the informational externality discussed in the book concerning transactions of rights in rem. The lack of institutional specialization leads to significant information costs if rights in rem are transferred.  Third, since local legal orders are usually less specialized and serve multiple purposes under a centralized allocation mechanism, they may appear weaker than they actually are. On one hand, the apparent favoritism of a local may merely reflect the fact that an outsider does not have a legitimate claim to rights in rem because the local that transacted with the outsider did not possess rights in rem (even though, as shown above, rights in rem exist and can be transferred). On the other hand, due to the social insurance role of land allocation, the local property holder commonly has a superior claim to land in the abstract than what can be acquired at any moment in time by another local or an outsider. Thus, local legal orders can be in better positions to track the competing or overlapping claims than a public registry based on a state-backed legal order, even though the political process required to adjudicate competing claims under the local legal order restricts trade opportunities.

Paul Dower

Kinross Assistant Professor of Development Economics, New Economic School (NES). Research Economist, Center for Financial and Economic Research (CEFIR).

10 January 2013 at 9:49 am 3 comments

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